When Fibonacci Fails
In Grade 1, we stated that support and resistance levels eventually break. Well, since Fibonacci levels are utilized to find support and resistance levels, this is applicable to Fibonacci!
Now, let us undergo a good example once the Fibonacci retracement tool fails.
Here is a 4-hour chart of GBP/USD.
Here, the thing is the pair has been around downtrend, which means you made the decision to get your Fibonacci tool that will help you place a great access point. You apply the Swing High at 1.5383, having a swing low at 1.4799.
The thing is, the pair continues to be stalling in the 50.% level within the last handful of candles.
You tell yourself, “Oh guy, that 50.% Fib level! It’s holding baby! Time for you to short this sucka!”
You short at market and begin day fantasizing that you will be driving down Rodeo Drive inside your new Maserati with Scarlett Johansson (or maybe you are a girl trader, Taylor Lautner) within the passenger chair…
Now, if you really did put a purchase at this level, not just would your dreams increase in smoke, but your account would have a serious hit if you did not manage your risk correctly!
L:et’s take a look at what went down.
It works out that that Swing Low was the foot of the downtrend and market started to rally over the Swing High point.
What is the lesson here?
While Fibonacci levels provide you with a greater possibility of success, like other technical tools, they do not always work. You do not know if cost will reverse towards the 38.2% level before returning to the trend.
It sometimes may hit 50.% or even the 61.8% levels before turning around. Heck, sometimes cost will just ignore Mr. Fibonacci and blow past all of the levels much like how Lebron bullies his way through the lane with sheer pressure.
Remember, the marketplace won’t always resume its uptrend after finding temporary support or resistance, but rather still goes beyond the recent Swing Low or high.
Another prevalent problem in making use of the Fibonacci tool is identifying which Swing Low and Swing High to make use of.
People take a look at charts in a different way, take a look at different periods, and their very own fundamental biases.
The end result is that there’s no absolute right method of doing it, particularly when the trend around the chart is not so obvious. It sometimes turns into a speculating game.
That’s why you ought to hone your abilities and mix the Fibonacci tool along with other tools inside your foreign exchange toolbox to assist provide you with a greater possibility of success.
Within the next lesson, we’ll demonstrate ways to use the Fibonacci tool in conjunction with other kinds of support and resistance levels and candlesticks.
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